Tidewater Inc.

Hello and welcome to the Tidewater 4th Quarter 2021 Earnings Call and SEER Pacific Offshore Acquisition Announcement. My name is Alex and I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, you can press star 1 on your telephone keypad. If you'd like to withdraw your question, you may press star 2. I'll now hand over to our host, Wes Kocher, Vice President of Finance and Investor Relations. Over to you, Wes.

Thank you, Alex. Good morning, everyone, and welcome to Tidewater's earnings conference call for the three months ended December 31st, 2021, and also the Esquire Pacific Offshore Acquisition announcement. I'm joined on the call this morning by our president and CEO, Quentin Neen, our chief financial officer, Sam Rubio, our general counsel and corporate secretary, Daniel Hudson, and our vice president of sales and marketing, Piers Middleton. During today's call, we'll make certain statements that are forward-looking and and referring to our plans and expectations. There are risks and uncertainties and other factors that may cause the company's actual performance to be materially different from that stated or implied by any comment that we make during today's conference call. Please refer to our most recent form 10-Q for additional details on these factors. This document is available on our website at tdw.com or through the SEC at sec.gov. Information presented on this call speaks only as of today, March 9th, 2022. Therefore, if you're advised at any time sensitive information may no longer be accurate at the time of any replay. Also, during the call, we'll present both GAAP and non-GAAP financial measures. A reconciliation of GAAP's non-GAAP measures is included in yesterday's press release. And now with that, I'll turn the call over to Quentin. Thank you, Wes.

Good morning, everyone, and welcome to the fourth quarter 2021 Tidewater Earnings Conference call. Today's call will be slightly different, as in addition to catching you up on the quarter, we will update you on the business combination we announced simultaneously with the earnings release. We've also added a slide deck to go along with the press releases to help us present the synergy potential in this transaction, as well as provide some additional information on the deal. It was linked to the press release, and it's visible to those listening via webcast. Thank you for accommodating this last-minute conference call and for the releasing of two press releases in the wee hours of the night. But we had to find a time that didn't interfere with the NYSE or Hong Kong stock exchanges. As you can appreciate, deals come together when they come together. Also, Sam's been holding on to the earnings release for over a week, so we figured it best just to get all the information out to you in one fell swoop. So thank you, and here goes. I'm pleased to say that this has been another solid quarter for Tidewater and a busy quarter as we had several transaction and events since we last spoke. In addition to the solid quarter, we closed on the debt refinancing that we mentioned on the third quarter earnings conference call. We terminated early the tax benefits preservation plan. We bought out our joint venture partner in Angola, and we announced last night the entering into a definitive agreement to acquire the 51-vessel fleet of Swire Pacific Offshore. Revenue surprised to the upside in the fourth quarter. Revenue was just over $105 million for the quarter, up 14% from the third quarter. The increase is positive, but the trend is even more noteworthy. Usually the seasonal softness in the North Sea offsets any increases in the other areas in the third and fourth quarters, but this year the North Sea was up slightly and the other areas were up nicely, resulting in the 14% increase. Also noteworthy, quarterly revenue has ticked up every quarter this year, a good indication that activity levels are increasing and are becoming expected and accepted by our customers as we proceed past the pandemic-driven pullback and into an increasing offshore activity cycle. Historically, and forgive me as I know most of you have heard this before, but I like to remind people each year, the first quarter is the weakest quarter of the calendar. Like the typical fourth quarter, it's due to weather in the North Sea, but in addition to that, some customers charter on a calendar year basis at the beginning of the year, so you get a bit of charter hire gap in the first quarter. Gross margin also improved during the quarter, up 3.2 percentage points to 32.2% before the non-cash impairment charge. That pushed the annual gross margin up to 29.1%, just shy of our 30% guidance for the year. Our G&A costs for the year included $2 million for the transaction we just announced, and you may recall that G&A had bumped up last quarter due to increased professional fees. Of course, we were necessarily vague last quarter as the deal was in negotiations, but after the deal cost, G&A for the year was $66.6 million, down 10% from the $73.4 million in 2020. Our annualized G&A expense for the first quarter for the fourth quarter was $68.4 million. We're going to talk a bit about G&A going forward in a moment as we get into the transaction with Squire Pacific Offshore. But just as a reminder, the combined 2014 G&A for Tidewater and Gulfmark Standalone, the peak of the last cycle, was $253 million. And the combined G&A at the merger was $143 million, where now it's $66.6 million. We're quite confident in our ability to achieve the estimated G&A synergies in this deal, and we will give you some more details on that later in the call. Free cash flow for the year was $52.2 million, and the bulk of it was earned during the first half of the year. We were free cash flow positive every quarter of the year, and I'm certain you recall that being so is one of our mantras as we go through to a more recovered offshore vessel market. And the reason for the lower free cash flow in the second half of the year is due to vessel reactivations. This is going to be the same for the first half of 2022, as the gross margin from the additional vessel reactivations doesn't overwhelm the cost to reactivate until the second half of 2022. The other mantra that we have been relaying is that all boats are going to be working or sold by the end of 2022. We're on track for achieving that. In addition, 49 of the 51 Swire Pacific offshore vessels are active, and we intend to make sure that 49 remain being fully employed. Vessels in layup cost us $13.7 million in 2021. That's four percentage points of gross margin. Recall that pandemic-related expenses are costing us approximately five percentage points, both op-ex and off-hire impacts. I'll let Sam update you on the new bonds we issued in the fourth quarter and the new revolver in a moment, but we have a few other events that I'll update you on before I hand the call over to Pierce. We terminated early the tax benefits preservation plan in the fourth quarter. You will recall we put it in place just as the pandemic hit to preclude the unnecessary or inadvertent limitation of our tax credits, which are substantial, over $400 million. One of a few key factors in tripping the IRS limitation on these attributes was the acquisition of the Goldmark in the fourth quarter of 2018. The tax limitation determination is a rolling three-year computation, and as soon as the three-year anniversary of that deal occurred, the Board moved to early terminate the plan. We in the Board appreciate that these plans can be seen as not shareholder-friendly, and that is certainly not our disposition. As soon as the probability of tripping the plan was lowered sufficiently, the Board acted to terminate the plan. With regards to the proposed transaction involving Squire Pacific Offshore, it elevates the rolling three-year average naturally, but not enough to concern us. Another transaction that we completed early in the first quarter of 2022 is the acquisition of our partner's 51 interest in Sonatine, our joint venture in Angola. We purchased the outstanding 51% for $11.2 million. Doing so allows us to fully control and operate our business in Angola, allowing us to bring the efficiency improvements we have brought to the rest of Tidewater to Angola. It eliminates the commission we were paying to the joint venture and allows us to consolidate the $10 million in net assets held by that joint venture. This transaction allows us to use the platform in Angola for growth throughout West Africa, including the 25 Swire Pacific Offer vessels located there. Also in the fourth quarter, we initiated the previously mentioned at-the-money stock issuance plan, the ATM plan. We issued no shares under that plan since it was put in place in the fourth quarter. Our intended use for the plan is to repurchase Jones Act warrants. Jones Act warrants, as many of you recall, are the warrants given to foreign equity holders who do not meet the U.S. citizen requirements, so they can't hold regular equity shares due to the Jones Act foreign holder limitation. Our intention with the ATM plan is to create a market for those warrants by issuing new equity shares under the ATM plan in exchange for those warrants. No new net shares are intended to be issued. This plan is to facilitate getting out of the Jones Act warrants. We still have approximately 1.2 million Jones Act warrants remaining from the Tidewater and Gulfmark restructurings, and we intend to issue 8.1 million in the proposed transaction involving Swire Pacific Offshore. If you're holding these warrants and you want to get out, just give us a call. Obviously, we control the issuance and we're mindful of what the market can bear at any given time. We're not interested in adversity impacting the price, but give us a call if you're interested. We're open to working something out. There's a win-win in creating more float with no dilution to equity holders. And last but certainly not least, let me give you an overview of the strategic rationale for the proposed transaction involving Swire Pacific Offshore. Piers and Sam will give you more details. As I just mentioned, we intend to issue 8.1 million Jones Act warrants and 42 million of cash for a total purchase price of about 190 million. The acquisition is debt-free. The value per ship of this transaction is 3.7 million compared to Tidewater's average per ship value of 5.4 million. Our intention is to operate the new vessels under the Tidewater brand. Many investors do not know much about Swire Pacific Offshore, but within the industry, it is known as one of the premier operators. Their safety record is impeccable. Their reputation with clients is stellar. Their vessel fleet is world-class, and their mariners are top-notch. It's a great company, full stop. Tidewater will now own the largest fleet of OSDs in the industry with 174. I'll talk about some of the other strategic merits of the deal in a moment, but we believe the combination of these fleets presents a great opportunity to drive earnings and free cash flow growth and the recovery of the offshore as the recovery in the offshore vessel market continues. Furthermore, we've identified meaningful synergies that we can realize by bringing their operations to our scalable shore-based infrastructure. Squire's fleet of 51 OSVs is primarily located in West Africa, Southeast Asia, and the Middle East. The Squire fleet is comprised of a mix of PSVs and anchor handlers with a nice mix of large vessels within each group. The combined fleet of 174 OSVs is now the largest in the industry. We will have a sizable presence in every major market globally. We've remained weighted towards PSVs, but believe the large anchor handlers acquired from Squire will capitalize on the forecasted improvement in the drilling market. Another compelling aspect of this transaction is not only are we now the largest OSP operator in the space, but the combined fleet is also the youngest in the industry of any large fleet. We believe the combination of size and fleet quality will allow Tidewater to position itself as the OSD operator of choice in every major region globally. We have been proponents of equity-driven relative value transactions, and that's what we have done with Swire. On the market value basis, we are clearly the most investable company in the sector. Furthermore, given the nature of the Jones Act warrant and cash split, we retain our balance sheet strength, which we believe is the prudent approach to running the business, but also allows us the flexibility to pursue additional avenues of growth. If you'll recall, this isn't our first time to approach a sizable M&A transaction. We previously consummated the Tidewater Gulfmark Merchant and developed a strategy to realize synergies from that transaction. We successfully identified and executed on our strategy, realization strategy, and outperformed our initial expectations based on continuous improvement initiatives and optimizing the shore base infrastructure. It's also important to note that that wasn't a one-off event. It's something we focused on over time, and as a result, we're able to achieve 10 consecutive quarters of G&A reductions. I bring this up as I believe we have a playbook that we'll be able to tweak and implement as we approach the new SWIRE transaction. All in, we anticipate $45 million of synergies from the combination of these two businesses. The elimination of duplicate corporate-level expenses is a large portion of the synergies, as well as regional-level source-based costs where our operations overlap, and then operating the expense savings as we leverage existing supplier relationships and operating protocols. When you look at the fleet on a combined go-forward basis, that is excluding any vessel that was sold in 2021 or is currently out for sale, the combined company would have generated 86 million of EBITDA in 2021, and that's with 45 million synergies compared to the Tidewater standalone EBITDA of 35 million. There's no doubt that the synergies we expect to realize from this transaction will be meaningful from an earnings perspective, but we are just excited about the added earnings leverage that the Squire acquisition provides us. Bringing the combined fleet up to 90% utilization would add about $100 million of EBITDA. And in addition, for every $1,500 of day rate increase, all else held constant, EBITDA would increase another $100 million given our substantial operating leverage. To help put this in perspective, to the extent our fleet day rates approach 2014 levels, we generate nearly $700 million of EBITDA. Turning to the regions, as shown by the performance of the Tidewater West Africa region over the past two quarters, this region is rebounding from the pandemic lows This water Pacific offshore fleet combined with our now wholly-owned position in Angola and the sizable infrastructure we have demonstrated to you by our significantly reduced G&A cost structure, we will enable significant synergies on both the administrative and operating cost categories. The high-quality fleet we acquired now positions Tidewater with the largest fleet of active vessels in the region. We believe there's been a flight to quality, which is evident in the working fleet, which we believe will continue to accrue benefits as this market continues to grow over the coming years. Swire Pacific Offshore's current position in the Middle East will be a natural addition to our current operations in that geography. Again, benefits from a sizable shore-based infrastructure footprint and improved operating expense management through economies of scale. Our position in Southeast Asia has been limited to Thailand over the past five years, but Swire has an enviable position in the area, and our Thailand business will touch nicely into their operations. In this area, we will be adding more G&A costs as we will invest in that area's existing infrastructure. Similar to our combined West Africa fleet, we've seen a similar collector quality, and given Swire's vessels are completely utilized, this time speaks to the quality of their fleet. The combined fleet will similarly be the largest active fleet in the region, which positions as well in growing oil throughout the oil and gas market, but also provides us a better platform to participate in a rapidly developing offshore wind market in the region. The 51 vessels for our specific offshore fleet include one seismic vessel. As one vessel in layout and perhaps two additional vessels will be determined to be uneconomic and held for sale. One of the vessels may be sold prior to closing. We'll make a final determination after the closing of the transaction on the number of vessels to be sold with the perspective of an enhanced geographic footprint to deploy the vessels within on top of a swiftly improving market. However, we have acquired a relatively young fleet with an average age of 10.2 years compared to our fleet's current average of 11 years. Importantly, the large PSVs and anchor handlers meaningfully improve our combined age profile in these vessel classes and give us a more compelling offering to our customer and extends the earning profiles of the fleet. The day rate of the Swire fleet in 2021 was 11,913, 15% above our day rate average for 2021 of 10,335. We are excited about the transaction. We believe that the fleet quality, the earnings power, and the preservation of our balance sheet leaves us well-positioned to pursue additional strategic opportunities in the future. The transaction is envisioned to close in 30 to 60 days. And with that, let me turn it over to Piers for an overview of the company's performance by region and some additional commentary on the proposed transaction.